CENTRAL BANK SILLINESS

Central banks everywhere, or at least everywhere that counts, are lowering interest rates to absurd levels, in some European cases, minus 1% which means, paying the top debt issuers such as Governments, a fee to keep your money.

And why? Because outside of America, albeit there’s some negative economic indicators coming from there, they’re worried about recession fears. In my view they’re totally wasting their time. The days when raising or lowering the base rate by a quarter of one percent has an impact are long gone. Obviously a business working on an overdraft is hardly going to spring into expansion mode because of this relatively small shaving off their interest bill.

There are clear recessionary signs in Australia and in Auckland in particular in New Zealand. They shouldn’t be a concern. Periodic downturns are valuable purges of waste and lead to greater efficiencies and thus form a solid foundation for the next upturn. Recessions affect confidence and become self-fulling. But so be it as that’s the market economy acting as it should and the efforts of central banks to level things out are unhealthy.

Following the 2008 banking crisis an unprecedented amount of cash was created which led in due course to booming economies. But not without disgruntlement as employees complained of static incomes. In fact that wasn’t so, rather large numbers of hitherto unheard of high paying jobs in the burgeoning new tech fields were created while the surviving, still standing traditional jobs of waiters, drivers, teachers and nurses etc gained job security but comparatively little income growth.

With so much cash sloshing around looking for an outlet share-markets soared and became self-fulling as they drove up prices. So too with commercial property markets, these having appeal as absorbers of large lumps of idle cash. With record low interest rates, as always, this the yield benchmark, on face value accepting small dividend returns from shares and commercial property made sense. In fact it didn’t as interest rates are a very bad indicator of value, particularly with commercial property, given their volatility over time. Nevertheless, these booming markets led to some commentator’s disgruntlement that such enormous gains were falling unearned into share-market and commercial property investors pockets. This was naïve. Here’s why.

The vast majority of share-market investing is by Funds, being entities tracing back to mum and dad pension purchasers. So too with commercial property. My company owns a prime Sydney CBD office tower, once the 4th tallest in the city. I’m told that when we bought it 16 years ago we were one of 64 private CBD building owners. Today we’re one of four, the rest being owned by investment Funds, tracing back to mum and dad de facto owners.

All of that said I return to my central proposition, namely that trying to prevent an inevitable cyclical economic downturn by tiny shifts in interest rates is simply silly and won’t work. What always works though is meaningful tax cuts. Trump fired up the US economy by large corporate tax reductions. The Australians will achieve the same result with their planned across-the-board tax cuts putting more cash into everyone’s pockets. This is the much derided Laffer curve theory but despite the derision it will work.

The criticism applies to the claim by Laffer curve proponents that cutting direct taxes ultimately causes no loss of government revenue. The claim is correct, depending on the degree of the tax cuts and more important, the existence of sales taxes.

There’s another factor currently driving the recession concern and that’s Trump’s ignorant anti-trade economic nationalism, slapping tariffs here, there and everywhere. The result is something we last saw in the early 1970s which I well recall. That is a competitive drive by nations to devalue their currencies.

Trump has just woken to this reaction and is bawling unfair, despite he being both solely responsible and helpless to do anything about it. And the inevitable unavoidable result. That’s easy as there’s only one and that’s the return of cost inflation.

5 Comments

Hi Bob, whats your opinion on the state of Fonterra at present?
Cheera fi

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Could you alter the page I one can copy and paste into Word or make the page printable

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Could you alter the page so one can copy and paste into Word, or make the page printable.

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In the discussion about Trade, why do people always blame Trump and ignore the Tariffs and other restrictions US trading partners have already in place against the US?
Trump is on record multiple times saying that he prefers Free Trade which is ‘fair’ trade. He has said that ideally he wants Tariff free trade between all their partners.
Unfortunately the only lever he can pull to force a new arrangement is reciprocal Tariffs.
It’s worked with Canada and Mexico and eventually will work with China.
The US market is too big and too important for China not to have access. Trumps Tax Cuts are helping US consumers absorb some of the Tariff cost and I think the US only sends 7% of its exports to China anyway. I guess it will come down to who will blink first.
I pick China.

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A friend of mine (FB friend, if that counts) educated somewhere in Epsom with lot of hieroglyphics after his name wrote:

“He is quite correct (Referring to Bob). Reverse monetarism does not work. And his analysis is accurate. The current mixture of Keynesian stimulation and increasing the money supply destroys any concept of real value. The last recession that was handled well was in 1921 before Keynes corrupted economics.”

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